By Ollie Cooper, Money team
We’ve all heard consumer advice that’s repeated so often it almost becomes cliché. So, every Friday the Money team get to the bottom of a different “fact” and decide whether it’s a myth or must.
This week it is…
‘It’s harder to get a mortgage if you’re self-employed’
We’ve enlisted the help of Pete Mugleston, managing director and mortgage expert Online Mortgage Advisor, and to help us get to the bottom of this one, he’s outlined two examples.
“By looking at the two hypothetical individuals, Person A and Person B, I aim to outline the differences and nuances of securing a mortgage under two very different circumstances,” he says.
Person A: Self-employed – annual income £60,000
Person A is a self-employed professional with an annual income of £60,000.
They run their own business, providing services directly to clients and managing their finances independently.
“In the realm of mortgage applications, self-employed individuals like Person A face a unique set of challenges, especially if they do not have the required proof of accounts readily available,” Pete says.
When it comes to securing a mortgage, lenders typically rely on financial documents to assess an applicant’s income stability and affordability.
“For self-employed individuals without the necessary proof of accounts, the road to mortgage approval can indeed become more arduous.”
Without the required documents such as two to three years of certified accounts, SA302 forms and business accounts, Person A might find themselves facing several obstacles…
“One potential hurdle is the possibility of a larger deposit requirement – lenders often view self-employed applicants without sufficient financial documentation as higher risk,” Pete says.
“To mitigate this risk, they may request a more substantial deposit, possibly ranging from 20% to 25% of the property’s value.”
For the average UK property, with the value sitting at around £263,600, that deposit could range between £52,700 and £65,900 – a far cry from the more reasonable 5-10% deposit.
However, in some cases, lenders may consider Person A’s past and projected future earnings.
If they can demonstrate a history of consistent income through bank statements, contracts of future work or other evidence, this may strengthen their case.
“However, this process can be complex and may not guarantee approval,” Pete says.
Lenders also assess the stability of income for self-employed individuals.
Unlike salaried employees with predictable monthly earnings, self-employed individuals may experience fluctuations in income due to seasonality, market changes or other factors.
“This variability can raise concerns for lenders, who want assurance that the borrower can consistently meet mortgage repayments,” Pete says.
“Without the required proof of accounts, Person A’s journey to securing a mortgage may involve more stringent requirements, additional scrutiny of income, and a potential need for a larger deposit.”
Person B: Employed full-time – annual income £40,000
Now let’s turn our attention to Person B, who is employed full-time with an annual income of £40,000.
Person B holds a traditional job, receiving regular payslips and tax deductions through the PAYE system.
“In the eyes of mortgage lenders, Person B represents a more straightforward case compared to Person A, despite earning £20,000 less per annum,” Pete says.
“For employed individuals like Person B, the process of obtaining a mortgage tends to be smoother.
“Person B can easily provide payslips, P60 forms and other employment-related documents to verify their income.”
These documents offer a clear and consistent picture of earnings, making it easier for lenders to assess affordability.
“With a reliable income stream and documented financial history, Person B may qualify for standard deposit requirements, typically ranging from 5% to 20% of the property’s value.”
Lenders can conduct a straightforward affordability assessment for Person B based on their documented income. The process usually involves multiplying their annual salary by a standard factor (often four to 4.5 times) to determine the maximum mortgage amount.
“In comparison to the self-employed Person A, Person B’s path to mortgage approval is generally smoother, with fewer hurdles related to income verification and deposit requirements,” Pete says.
While employed individuals like Person B benefit from easily verifiable income and standard procedures, self-employed individuals such as Person A face a more challenging path, particularly in circumstances where they have less than the required proof of accounts.
In summary…
This one is no myth.
“For self-employed individuals, the key lies in meticulous financial preparation, including maintaining accurate accounts, saving for a potentially larger deposit and providing additional evidence of income stability,” Pete says.
You can also seek professional help if required.
With all that in mind, the money must here if you are self-employed is to be well-prepared!
